FD interest rates are so high right now that people have dumped the stock market. At 7-8% interest rates I can understand why.

The only problem is that the way FDs are taxed it severely impacts the compounding effect. Meaning, if your profit in FD in a given year exceeds ₹40,000 then tax is deducted at 10%. This is deducted on a yearly basis irrespective of whether it’s a 2 or 5 year FD.

How to avoid?

I’m assuming everyone here makes more than 2.5L per annum. So submitting form 15G/ Form 15H is of no use to you.

The only hack left is to divide your FD in multiple banks. Don’t keep more than 6L in a single FD. Why? Because at 7% interest rate that comes to ₹42,000 profit so ₹4,200 tax will be deducted. Instead divide the 6L into 2 banks.

7% interest on ₹3L is only ₹21,000 profit which is below the tax limit and hence no tax will be deducted.

👉🏻 Note: You still have to pay the who tax as per income slab filing taxes. But then you can pay from your savings account instead of it being deducted from FD since it has higher interest rate.
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